Huntsman Corporation

Greetings and welcome to the Huntsman Corporation's first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ivan Mercusa, Vice President, Investor Relations for Huntsman Corporation. Thank you. You may begin.

Thank you, Melissa, and good morning, everyone. Welcome to Huntsman's first quarter 2021 earnings call. Joining us on the call today are Peter Huntsman, Chairman, President, CEO, Sean Douglas, Executive Vice President, CFO, and Tony Hankins, President of Polyurethanes. This morning, before the market opened, we released our earnings for the first quarter 2021 via press release and posted it to our website, Huntsman.com. We also posted a set of slides on our website, which we will use on this call this morning while presenting our results. During the call, we may make statements about our projections or expectations for the future. All such statements are forward-looking statements and, while they reflect our current expectations, they involve risks and uncertainties and are not guarantees of future performance. You should review our filings with the SEC for more information regarding the factors that could cause actual results to differ materially from these projections or expectations. We do not plan on publicly updating or revising any forward-looking statements during the quarter. We also refer to non-GAAP financial measures such as adjusted EBITDA, adjusted net income, and free cash flow. You can find reconciliations to the most directly comparable GAAP financial measures in our earnings release, which has been posted to our website, Huntsman.com. I'll now turn the call over to Peter Huntsman, our Chairman and President, CEO.

Thank you, Ivan. Good morning, everyone. Thank you for taking the time to join us. Let's turn to slide number three. Adjusted EBITDA for our polyurethane division in the first quarter was $207 million versus $84 million of a year ago. This improvement versus the prior year was largely driven by improved margins due to higher prices, primarily in the component end of our business, which more than offset the approximate $10 million EBITDA impact related to winter storm URI that we experienced in February. Our MDI volumes declined approximately 7% versus the prior year's first quarter, primarily due to a fourth quarter 2020 TNI at our Geismar, Louisiana, which we deferred to this year's first quarter. Some impact related to winter storm Uri and our planned need to build inventory ahead of our scheduled Rotterdam turnaround. However, improved margins more than offset the decline in volumes. We will note that our differentiated MDI volumes, which include our automotive, elastomers, and spray foam businesses, were up 4% for the quarter. Demand trends in our core markets of construction and automotive have led to solid underlying growth in the quarter, when excluding the impact from storms and turnarounds, Our insulation businesses, including spray foam and our composite wood product business, remain solid. Its markets, such as North American residential construction and renovation, remain strong. Many have inquired as to the impact the reported ongoing chip shortage in the automotive industry is having on our polyurethane business. By the end of the first quarter, we haven't seen any impact to our customers as our automotive business was up 12% globally compared to the previous year. We believe this has been a result of our being more European-centric and supplying a market segment that is more skewed towards luxury automotive. So far in the second quarter, we are seeing a 2% to 3% drop in volume due to chip-related slowdowns. We've reallocated this volume of MDI to other areas, and expect to earn similar margins. We're also pleased to see a strong recovery in our global elastomer's business, largely comprised of footwear, along with other specialty end use and industrial related markets. The improvement in footwear is being helped by the gradual reopening of economies, which is having a positive effect on the retail markets. The industrial side of our elastomer's business correlates somewhat with global PMIs, which have continued to expand around the world. Short-term and long-term fundamentals of our polyurethane business remains positive. We are benefiting from some level of inventory restock, and our own inventory levels remain below normal levels for this time of year. We're keeping an eye on the evolving reoccurrences of COVID pandemics around various regions of the world, overall demand reflected within our order books remained solid. Our margin within the first quarter benefited more than we had anticipated from ongoing tight conditions within the industry. In addition to various planned turnarounds within the industry, unscheduled outages compounded the situation. We were fortunate that our Geismar Louisiana facility was able to continue largely uninterrupted while others were forced to declare force majeure due to damages sustained by winter storm Uri. As previously mentioned, we estimate the negative impact from Uri on polyurethanes was approximately $10 million. This was largely a result of supply chain and raw material constraints. This is a testament to the team that we have at our Geisman Louisiana facility and their ability to work through these conditions in a safe manner to keep it running. Currently in the Americas, we believe most of the industry capacity is in the process of returning back to full operating rates. Business conditions in China remain solid. Our margins in the first quarter exceeded our expectations. Given the completion of local turnarounds and some announced capacity additions within China, we've seen margins recently recede a bit, though they are generally firm. Within our POMTB joint venture with Sinopec in China, where we own 49%. We benefited from very strong margins, largely the result of industry outages and stronger than expected demand in the quarter. As of the current moment, and once in every four year multi-facility turnaround at our Rotterdam MDI plant is nearing completion. We are highly dependent on many other chemical companies conducting turnarounds and everyone meeting a pre-agreed synchronized timeline to restart. Due to some delays with a third-party supplier, our startup is delayed. As a result, the total estimated EBITDA impact from this turnaround is now estimated to be around $25 million versus the initial $15 million estimate we gave you last quarter. Our facility is about ready to start back up. We're hopeful that we do not experience any further delays that are outside our control. Putting it all together, we remain very positive about the trends that we are seeing in polyurethanes globally. Demand is good. The industry is balanced. Substitution will continue, and areas driven by sustainable solutions such as energy efficiency are expected to follow trends that will have a very positive impact on the business for the foreseeable future. Looking into the second quarter, we see seasonal strength being partially offset by turnaround costs and potentially lower MDI margins in Asia. We would expect the second quarter adjusted EBITDA to be around 5% stronger than the first quarter dependent upon the Rotterdam TNI, which would be up significantly versus a year ago, period. Let's turn to slide number four. The performance product segment reported adjusted EBITDA of $63 million compared to $58 million in last year's first quarter. We saw growth in our Asia business and strong demand and margins for most of our division's products. This combined with lower fixed costs more than offset the approximate $14 million of headwind that resulted in wind or storm yearning. Total volume for the division declined 3% due largely to this storm and due to the recent discontinuation of certain polling arrangements associated with the chemical intermediates business that we sold this past year. On a pro forma basis, we estimate that our underlying volumes were actually up 6% year over year, leading the way with strong demand in our performance and means portfolio, largely in our sustainability-related products, such as the means that are sold into VOC-free polyurethane catalysts and into the wind market. Growth in the construction markets have also benefited our means that go into coatings and adhesives, as well as the Malacan hydride business that serves the UPR market. Volumes increased 6% year-over-year within our Malacan hydride business. Raw material costs have been rising, but we've been successful in passing through price increases to offset higher costs. We believe that some of the lost sales in the first quarter due to the winter storm will be captured in the second quarter. This, combined with some of the seasonal strength and improved margins, should translate into EBITDA growth in the second quarter over the first quarter of about 5 to 10 percent for performance products. Let's turn to slide number five. Our advanced materials business reported adjusted EBITDA of $44 million, down 8% versus the prior year. The first quarter last year still experienced solid aerospace results before the global pandemic started significantly impacting the commercial aerospace industry. As a result, our aerospace sales were down approximately 40% year over year. It's a primary reason that our adjusted EBITDA declined year over year. As we previously stated, we believe our aerospace business bottomed in the fourth quarter of 2020. While we still anticipate full recovery to pre-pandemic levels will take at least a couple of years, we did see a sequential improvement in our aerospace sales, and we are encouraged that recovery is a bit better than we had anticipated. When excluding aerospace, the underlying volumes of our other core specialty businesses experience growth year over year from improved trends as well as positive contribution from our recent acquisition of CDC thermal set specialties and Gabriel Performance products. Our non-aerospace business, EBITDA, grew 8.5% over last year. while our non-aerospace EBITDA, including our recent acquisitions and divestitures, grew at 28%. The integration of both acquisitions remain on track, and we're confident that we will achieve the run rate synergies that we communicated at the time each respective transaction was announced. We believe that overall fundamental demand is improving in our core businesses. Looking toward the second half of 2021 with improving fundamentals as well as contributions from the recent acquisitions, we expect adjusted EBITDA for our advanced material division to be about 10% better than the first quarter. Let's move to slide number six. Our textile effects division reported an adjusted EBITDA of $25 million for the first quarter, which is 25% above the comparable prior year period. Volumes in the quarter grew 10%. We saw an improvement in volumes across nearly every product category, including formal apparel, which has lagged since the onset of the pandemic when consumers began working from home, tired in sweats and old leisure suits. We believe that the broad base recovery in volumes reflect pent-up demand from consumers, in step with reopening of economies as mobility restrictions are lifted. consumer sentiment in the US and Europe has increased, as well as retail store sales in each region. We believe inventories in the retail channel are still below historical levels, supporting a very strong order book. Sustainability within this channel also remains a focus for our customers. This macro trend continues to favor our leading technologies that are environmentally friendly in areas such as water reduction, which continues to gain share. Our textile effects division has come through two challenging years, including facing trade wars in 2019, followed by the global pandemic of 2020. We believe that this business is quickly returning back to where it was in 2018, and that should be reflected in our second quarter results as we move throughout the rest of the year. Before sharing some concluding thoughts, I'd like to turn a few minutes over to Sean Douglas, our Chief Financial Officer.

Thank you, Peter. Turning now to slide seven. We were pleased to see a continuation of a strong recovery in the first quarter of 2021. Suggested EBITDA increased by $124 million year-over-year and by $49 million quarter-over-quarter. This is in spite of approximately $25 million of negative impact to EBITDA in the first quarter of this year from winter storm Yuri that slammed the Gulf Coast in February. The overall decrease in volumes year over year is primarily attributed to our aerospace business, where sales in the prior year period were strong before the pandemic. As Peter has commented, aerospace revenues were down approximately 40% versus the prior year. However, they have bottomed. and we saw a meaningful improvement in the first quarter of this year versus the fourth quarter of the prior year. Variable margins significantly improved year over year and quarter over quarter, as demand for products has steadily improved and increases in our sales prices have exceeded increases in our raw material prices, allowing overall adjusted EBITDA margins to recover to mid-teens. Turning to slide eight. Regarding synergies from recent acquisitions, we have now exceeded the $20 million target we set, facilitated by combining our polyurethane spray pump businesses and creating our Huntsman Building Solutions platform. With respect to the CBC Thermoset acquisition, we estimate having already achieved a current annualized run rate of approximately $9 million of synergies and are on target to achieve the $15 million near the end of 2021. We are also on target to achieve the Gabriel synergies of $8 million by early 2023. With respect to our cost realignment and optimization efforts, we remain on target to deliver as previously shared. Of the $40 million polyurethanes target, we estimate having achieved an annualized run rate of approximately $15 million to date. Within advanced materials, having a $10 million target savings, we have achieved an annualized run rate of approximately $7 million to date. During 2021, we estimate a total net cash spend related to all these combined initiatives of approximately $70 million, of which approximately $15 million is CapEx related. Now turning to slide nine. We ended the quarter with approximately $2.1 billion of liquidity. During the first quarter, we redeemed in full our 2021 Euro notes at par by paying the U.S. dollar equivalent of $541 million. We also completed the acquisition of Gabriel Performance products for approximately $250 million. Our net leverage ratio as of March 31st, 2021, based on an LTM-adjusted EBITDA, is approximately 1.2 times. We expect to spend approximately $330 million in capital expenditures this year. This includes an estimated $80 million of spend on our Geismar splitter that is expected to be completed mid-next year. This also includes a current year incremental spend of approximately $30 million on high return growth projects commenced this year in our core downstream platforms. As a reminder, we announced on our prior call that we had collected approximately $73 million from the sale of property in Switzerland, which we are, in effect, reinvesting in these growth projects. We built working capital in the first quarter, although to a lesser degree than originally expected given the impact of winter storm Yuri. However, our inventory levels, particularly within our polyurethane business, where we are just coming out of our quadrennial cluster turnaround in Rotterdam, remain tight. Our free cash flow for the first quarter of 2021 was less negative than we had anticipated, largely because of lower working capital levels and higher adjusted EBITDA that had been originally expected, given the strong recovery. On our prior earnings call, we had shared that we expected our free cash flow conversion for this year to be somewhere near 20%. Given our current outlook on this year, we would estimate this to be more around 25%. On a pro forma basis, considering the incremental spend on growth projects, synergy, and cost optimization initiatives, our estimated cash conversion is more towards 40%. In light of our strong balance sheet and confidence in maintaining strong free cash flow, we announced yesterday that our board of directors had approved a $0.10 per share per annum increase in our dividend. This is a 15% increase. Peter has repeatedly commented that we would maintain a competitive dividend. We remain committed to maintaining a strong balance sheet and strong free cash flow while we continue to build our downstream businesses, realign our costs, and return value to shareholders. Peter, back to you.

Thanks, Sean. Let's turn to slide number 10. A topic of increased focus by our investors and analysts is how much of Huntsman's business is quote-unquote sustainable, the most obvious and surface-level answer to this point to our large and growing businesses that address markets such as energy efficiency, lightweighting, alternative energy, and water reduction. But the fact of the matter is that, in my opinion, nearly all of our business address sustainability in a very real way. At Huntsman, we continue to look for ways to do more with less, helping to bring real and sensible solutions to our customers. Just for the record, the U.S. chemical industry is responsible for only about 3 to 4 percent of the total U.S. greenhouse gases, and Huntsman's emissions are significantly lower than our peer group. With recent divestitures, emissions at Huntsman have gone through a significant step change for the better. We'll be reporting these numbers in addition to how well we're tracking in order to achieve our Horizon 2025 targets within our upcoming sustainability report. We have been issuing this annual report since 2010. Sustainability is nothing new at Huntsman. We continue to look for ways to improve our operations and reduce our emissions. While we are open to looking at opportunities such as electrifying our facilities and utilizing other alternative energy sources, the adoption of many of these technologies are decades away and, in some cases, do not even exist today. In Huntsman's view, the best way to reduce carbon emissions is to bring solutions to our customers that help them reduce their emission footprint. Examples of this would be our insulation business, including spray foam. which is also able to utilize arterial polyols that use feedstock made up from up to 60% recycled PET waste. Other examples are in the lightweighting of airplanes and other forms of transportation. We're also helping to improve batteries through our ultra-pure ethyl carbonate portfolio. I could go on naming many other examples that help reduce emissions. We've maintained that Huntsman is actually carbon negative as we provide the means and solutions to help our customers and then users reduce their emissions well beyond the emissions that we are actually generating. And our best sustainability stories are in some of our biggest and most profitable businesses. We're very excited about where our company is heading and are looking forward to increase energy standards and the trillions of of stimulus dollars that are flowing globally towards the construction, manufacturing, and transportation sectors. Our business is sustainability, and we expect to benefit significantly from such global trends and measures that are being taken. Another often asked question from investors is where we are relative to our current view of normalized EBITDA. With the exception of our Chinese and European MDI component polymeric sales, that have been temporarily experiencing above-average margins, the remaining businesses within our portfolio are approaching or already at historical normalized levels. Having said that, we're still a far cry from all cylinders running. When our new Geismar splitter is completed and fully integrated, it will contribute around $30 million of additional EBITDA. We have yet to fully capture all synergies in our newly acquired advanced material assets, which will add another $15 million of annual EBITDA per year. We also have yet to capture approximately $40 million in annualized cost savings per year from our cost optimization plans. On each of these EBITDA enhancements, we are on target to deliver as committed. Furthermore, we're still running greater than $50 million in per year shy on aerospace, which we fully expect to recover over the next few years. With the exception of commercial aerospace, which we expect will eventually fully recover, our portfolio is stronger and better than it was pre-COVID. We made good strategic decisions during COVID to build out our core businesses. We are spending additional capital on high-return projects that will bolster these businesses and complement continued M&A opportunities. These capital projects provide excellent growth opportunities in areas such as batteries, semiconductors, and other megatrends. On our last call, I mentioned that we felt optimistic about rebounding back to our normalized levels of about $1.1 billion of adjusted EBITDA. Looking at the results of our first quarter, combined with the number of self-help projects in which we are now engaged, I feel we should see a year in total that may be very near the 2018 levels. Finally, I'm pleased to announce, because of our strong, reliable balance sheet and confidence in generating consistent, strong, free cash flow, we're increasing our annualized dividend amount by 10 cents per share from 65 cents to 75 cents. This represents a 15% increase. If you continue to look at appropriate M&A opportunities, this is our core platforms for growth, offering significant synergies expand our margins and free cash flow conversions. As we have said consistently, we are committed to our investment-grade balance sheet. We will be disciplined in consistently applying prudent financial criteria to each of these acquisitions. In short, I feel that we're off to a very good start this year. Now, on a personal note, we announced earlier this month that our CFO, Sean Douglas, is resigning to accept a calling to serve in the senior leadership of his church. For the past four years, Sean has been at my side. He's been a wonderful CFO. However, over the past 30 years, Sean has also served the broader interests of this company and our foundations. During Sean's tenure, we have transformed this company from a polystyrene plastics producer laden with five to eight times debt to an investment-grade market leader and differentiated in specialty chemicals. John, you lead this company, our foundation, and the culture we embrace today far better than how you found it. That, my friend, is a true legend. Thank you. Operator, this time we'll take any questions that are ready to go.

Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as possible this morning, we ask that you each keep to one question. Our first question comes from the line of Bob Cort with Goldman Sachs. Please proceed with your question.

Thank you. Good morning.

Peter, I guess, you know, one comment I consistently hear from shareholders is that maybe a desire for some return of capital via repurchase rather than dividend. It sounds like you're pretty optimistic about the forward and that you talked about maybe the M&A market's got a little froth to it. So when might we expect you guys to start deploying some of that capital towards a share purchase resumption? Thank you.

Well, Bob, very good to hear from you. Yeah, that is something that we're continuously looking at, and it's something that I think I publicly have stated that our number one priority with our cash is to deploy that capital into investment opportunities, M&A opportunities. And beyond that, we're going to be very carefully looking at share repurchases and dividends. And we obviously made a decision on dividends here in our last board meeting that took place two days ago. But I think that's something on an ongoing basis. My preference would be to see us deploy our capital smartly in M&A opportunities where we've got a good fit, where we've got some built-in synergies and opportunities to expand our product portfolio and technology. I think that's probably the fastest way to create shareholder value. Though having said that, just because we have it doesn't mean we are going to be forced to spend it. So I think that we'll continue to be prudent, and we continue to look for those opportunities, and the share buybacks will continue to be part of that evaluation going forward.

Thank you. Our next question comes from the line of Alex Yefermoff with KeyBank Capital Markets. Please proceed with your question.

Thank you. Good morning, everyone. And Sean, congratulations on moving on to new adventures. Peter, could you talk about component NDI market in China? It's been soft lately. What do you think is going on there? Do you have an idea where we could see stability or maybe even improvement in China markets?

Well, I think that we did see some tightness that really started in the fourth quarter where we saw component prices, the more commoditized end of our business, that we saw really over about a two-week period, we saw component prices rise about 20%. Again, that's 20% in prices over a two-week period. This was largely driven by because of outages and because there's very strong economic demand taking place as China recovers its economy on a post-COVID sort of a world. I would say that in the fourth and first quarter, we probably would have somewhere around $40 million or so of over-earned. Now, of that $40 million or so of over-earned, and that might be $40, $45 million on a quarter-to-quarter basis, I'd say that about one-third of that was European and two-thirds of that was China. We have a lot of our more commoditized component businesses in North America are more dependent on formula pricing, and so we don't see the fly-up in North America like we do the rest of the world, nor do we see the sudden drops in North America like we do the rest of the world. As we look into the second quarter, You know, I think that we'll probably see that over-earned, on a similar sort of ratio, probably around $20-ish million, give or take a couple million. I would say, though, that as we look at pricing over the course of the last couple of weeks, it is stable. I don't see it falling at the present time. And, you know, I think that we've, you know, I'm hoping that throughout the rest of the second quarter and so forth that we ought to we ought to see some stability in that pricing. I will just note that from the public notifications that have been discussed in China as well, we have some very significant turnarounds that will be taking place in the third and fourth quarter in the industry, not in Huntsman, but in the industry that will be hitting China later in the year as well. So, you know, as I've said in past calls, I think that as we look at the overall MDI capacity utilization, we're probably globally right now running – pretty close to 90%. And so you see a large disruption or closure take place around the world. You'll see the impact of that, I think, reverberate pretty quickly.

Thank you. Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your question.

Good morning. Peter, I was wondering if you could update us on your view of supply chain inventory and polyurethanes. We hear a lot about tightness in both isocyanates as well as polyols going into urethanes. What did your volumes run at HBS, and what is your outlook for the next few quarters as these dynamics start to normalize?

Well, I think that when I talk about the vision that we have and orders and so forth, you're probably looking at a month or two. into the future. So I certainly don't want to sound as though I'm speaking for the rest of the year, but these trends that we're seeing, our inventories are quite low. I think we probably could be moving even more product through HBS if we had it. Now, of course, we can cut off customers, but we do have some customer commitments and contracts and so forth that we're going to fulfill. And we're doing that right now. But we're seeing, I think, much stronger than normal growth taking place in our HBS business. And I think that that sort of growth is twofold. It's new houses that are being built. And it's also, I mean, can you imagine being a sales representative for selling insulation in the state of Texas after the devastating freeze? So, you know, I think that it really goes along an entire spectrum there. And I think that those are the sort of trends in energy conservation as you see the possibility of tax credits and so forth being given to people that are re-insulating their homes and using better products than what traditionally have been used and so forth. But I think that we're going to continue to see market share gains. in our HBS business and in those sectors of downstream MDI that we want to be focused in. But right now, I'd say that, again, just to summarize your question, inventories, I think, on both from what we see from our end and from our business are quite well in that entire supply chain.

Thank you. Our next question comes from the line of Mike Sisson with Wells Fargo. Please proceed with your question.

Hey, guys. Nice start to the year, and congrats again, Sean. We'll miss you. Peter, when you think about polyurethanes, it looks like it's going to have a record year in 21. I know it's a little bit early, but when you think about growth in 22 and beyond, can you maybe walk us through what are the variables there in terms of continuing to grow that business? How does the splitter affect it? I know you're more differentiated now, and then maybe acquisitions potentially over the next couple of years, and where can that EBITDA potentially go?

Well, I think that we have a great opportunity. Great question. I think we have a great opportunity to increase our margins. I've said in the past that I'm not sure that our polyurethane business necessarily needs more tonnage, though, again, I want to be very clear that We are going to be operating our facilities and de-bottlenecking our facilities and trying to get every ton out of our facility the very best we can. But I think that we need to be focused on how do we maximize the margin on a per-ton basis. And as we look at that going forward, I think it's going to be opportunities for us to align ourselves with customers that are further downstream, customers that are taking a higher – blend of products that are coming out of our MDI splitters that we continue to invest and grow our downstream businesses like HBS. We're going to continue to be looking at acquisition and opportunities, not just in spray foam, but in other areas where we can consume particularly the lower margin, more commoditized grades of our MDI and consume those internally and upgrade those internally. So, again, I think that we've got a great portfolio of volume within our business. We've got a great opportunity, I think, to continue to look for ways where we can expand incrementally on that volume. But I think what I think we'll continue to be mostly focused on is how do we bottom slice and how do we take the lowest margin segments of that business and continue to upgrade that. That's what we've invested in In our splitter, we continue to invest in cost reduction. We'll align our R&D around those customers and those applications that return us the most money. And we think longer-term sustainability is going to continue to be very important for us. And, again, I think from a macro basis, when I look at the overall industry, I just don't see a lot of new capacity over the next couple of years that's going to be coming into a market today. that is today operating probably somewhere in the very high 80% to 90% capacity utilization.

Thank you. Our next question comes from the line of Frank Mitch with Fernium Research. Please proceed with your question.

Hey, good morning. And Sean, it has been a pleasure to work with you. So obviously wishing you all the best. And if I could also wish you an early happy birthday.

Thank you very much. I'm an old man now, too. Frank, thank you very much. Much appreciated.

Yes. The reason why I knew is Peter informed me as to what he was planning on getting you, and you are going to be so surprised. That's fantastic.

His wife will be even more surprised.

Hey, Peter, I'm trying to level set here the second quarter. I'm doing a lot of puts and takes in terms of the guidance, et cetera. And I was coming up around 320 million of EBITDA. And if I figure 25 million, and that includes a 25 million negative impact from the turnaround, every four-year turnaround. However, you're over-earning by about $20 million, you just said. So that kind of gets us back to that 320 level. If that's right, you indicated that You know, normalized EBITDA, people have thrown around the number of $1.1 billion. It doesn't seem like we're that far off from that level. Is my math quasi right? And am I in the ballpark here?

Frank, probably one of the few times you've ever heard somebody tell you this, but I think your math is probably pretty close. Now, the fact that a dyslexic like me is telling you that ought to worry you, but I think, you know, when I look within our own guidance and our own expectations to what I'm presenting to our board of directors, you know, we're singularly, you know, a few million dollars apart one way or the other. Again, I... I think from what we have in the second quarter and from what our vision is for the rest of the year, I would concur with what you're saying.

Thank you. Our next question comes from the line of Hassan Ahmad with Alembic Global Advisors. Please proceed with your question.

Morning, Peter. Morning, Sean. Morning. Sean, it was great working with you. Best of luck, my friend. Thank you. Peter, question, just wanted to revisit MDI pricing in China, particularly with sort of a focus on the second half of the year. I mean, I know, you know, the first half has been sort of a little sort of tricky. We saw obviously some incremental capacity coming online. There was chatter of, you know, call it some inventory rebuild leading into Chinese New Year. So, obviously, with all of these puts and takes in mind and, you know, something that you mentioned about sort of incremental turnarounds in the back half of the year, could we be in a situation, you know, relative to right now in H2 in China where supply-demand fundamentals are actually tighter and we may actually see potentially another run-up in pricing there?

I think that right now we're probably looking at a pretty stable, that's what we'd like to see. I talked earlier about that run-up of kind of 20% in a week or two. I see prices have kind of gone back to that pre-Chinese holiday sort of time period. They feel like they've kind of stabilized in this area. I think that with the number of the facilities that are back online in China, and the economic growth that they've been experiencing, slowing just a little bit but still seeing significant growth. I think we're probably looking at hopefully stability between now and the end of the year. Now having said that, there have been some very large T&Is and maintenance work that includes over a million tons of capacity that's been pushed off for the second half of the year. But usually, I mean, unless there's a problem with that, usually those projects will build up inventory beforehand. And, you know, unless there's some unforeseen problem with restarts or something of that nature, you know, hopefully we'll see stability throughout the rest of the year.

Thank you. Our next question comes in the line of John Roberts with UBS. Please proceed with your question.

Thank you. Best wishes as well, Sean. Peter, another company in the epoxy market is targeting 30% EBITDA margins. Do you think Huntsman has a better or worse mix than the competition, and any thoughts on that kind of target?

Well, I think our mix is far, far better than the competition, but I'm slightly biased in saying that. So, you know, without knowing who you're talking about or anything, look, if we're able to earn it, we're going to earn it. And I think we've got a great batch of customers and so forth. I think that, again, we are probably a bit different than our competition in the amount of of volume that we're moving into the aerospace industry. That might seem like a bit of a frustrating position for us to be in right now, but I think over the past decade and over the decade to come, that position is going to serve us extremely well. It's been a very reliable earner for us and with margins that are on the high end of our spectrum of customers that we have globally. So I think that in an area like epoxies, I really don't compare us with our competition because we really don't compete a great deal with the more widely recognized epoxy producers around the world. I think our biggest competitors we have in that business really are smaller blenders and formulators that are downstream. And those are the people that we probably are competing more more aggressively against. So again, I say that tongue-in-cheek about us being far superior than our competition. I really just don't see us competing head-to-head with a lot of them.

Thank you. Our next question comes from the line of Matthew Blair with Tudor Pickering Holt. Please proceed with your question.

Good morning, everyone. Thanks for taking my question, and congrats to you, Sean. I had a question about Huntsman's EV exposure. Could you just generally talk about, you know, how much product you would place on an EV versus a traditional ICE vehicle?

Yeah, and Matthew, I hope you recognize your question from last quarter. and about a dividend. So, you know, you have a profound influence on our thinking as a company. So thank you very much. Yeah, look, on an EV vehicle, really the biggest difference that you're going to see between an ICE vehicle, internal combustion engine, an ICE vehicle, or an EV is going to be the motor and probably the weight. And as you think about that, We don't really supply a whole lot into the motor, into the drivetrain, and so forth. So we're not going to lose anything on that end of the spectrum. On the battery side, we have a number of formulations and a number of projects that we're presently looking at, particularly with the battery industry, the billions of dollars that are coming, hundreds of billions of dollars, actually, that are coming with the electrification, the battery R&D, the battery manufacturing. It's coming to the United States as well as to the great state of Texas. And those projects are underway right now. We think that there's significant opportunity for this company to be getting into carbonates and into other chemistry that we'll be supplying. And we hope to be in a position where we're able to announce some of those joint ventures in the near future with Huntsman. working with the battery manufacturers. So in the EV side, from the powertrain side, I would see that that is a plus for Huntsman. We actually would be selling more into that area. Now, the other category between an ICE and an EV that I see is overall weight. And most of these EVs, since they are really new vehicles, they're not just a They're not just taking an older vehicle and using the same frame and just putting batteries on it, but they're redesigning the entire car. And most cars today that are going to be completely redesigned from the ground up or from the frame up are going to be very conscious about weight. And when you think about lightweighting and when you think about, you know, using composite materials rather than metal, you think about adhesion instead of welds. that is certainly going to be an advantage to Huntsman as well when you think about light weighting. But I also think that light weighting is going to be on both EVs and ICE. And then the third area, when you think about comfort and you think about the sound insulation within the car itself. Paula, you're saying if you're driving a car where you can drive for hours on end and not have a sore back, not feel cramped, then you're probably sitting on an MDI-produced seat. If you're getting out of the car after an hour or so driving, you're sore and you're grouchy, you're probably sitting on a non-NBIC. So as these cars are being redesigned and refocused and so forth, we hope that they're moving towards more comfortable seating. But that's going to take place both within ICE and within an EV. So I think that if you were to take my preference, I would think that we're going to be advantaged more by an EV than we are on an ICE vehicle.

Thank you. Our next question comes from the line of Angel Castillo with Morgan Stanley. Please proceed with your question.

Hi, thanks for taking our question. Just wanted to touch base, I guess, a little bit more on performance products. So a very solid quarter there, and the margins for EBITDA look to be above 20%. So 2Q also very strong. Just curious as we think about that margin versus what you've done historically in that segment. I believe in the past you've talked about this business as an area where you could improve and then continue to, now that you can focus on it a little bit more specifically, continue to drive better value there. Yeah. How do you think about margins for the longer term, and just how do we think about kind of the progression from 2Q to the back half of the year for performance products?

Yeah, so on the back half of the year, one of the advantages we do have on the first half of the year is going to be the reliability, consistency of reliability in manufacturing that we've had. Second half of the year, we're going to be having a number of smaller turnarounds. These are facilities that, by and large, don't come down every couple of years. They usually come down, you know, for a week or two every year. And we're going to see some of those in the second half. So if we're a bit muted in the second half, it's not because – and those are going to probably impact the quarterly numbers, maybe $5 million to $10 million-ish. Now, having said that, from a manufacturing point of view, when we last saw – EBITDA performance on a quarterly basis where we are today. I think it's interesting to note that the vast majority of the profitability in the business was coming from a single application, and that was wind largely coming from China. And as we look at the wind contribution margin today versus wind, and that's our aiming products that are going into wind as a catalyst when they make the wind blades. that was 60% higher previous. If you go back to five, six years ago, that was about 60% higher. So we've actually seen wind margins fall, which I may say is necessarily a bad thing. What we've done is we've diversified our customer base more than just being reliant on one product. I would also say that when we look back in past years when we were operating at this level, of profitability. We also, in our Malake and Hydride business, we had a number of our competitors that were operating at sub-capacity design. And we had a lot of maintenance problems, like multiple facilities that were down at the exact same time, which caused Malake prices to go up. Malake prices right now are strong. Everybody's running. UPR downstream and everything from Lube additives through on the lake and hydride are running very well. And margins are there because we have a good customer base and because we've got good applications, not because customers are down. Excuse me, the competitors are down. When I look at the overall margin today in performance products, yeah, I think you're right. It's a good margin today, and I would hope that these sort of numbers, again, barring some you know, some effect on some maintenance projects that are going to be done later in the year, this is not to be a 20% sort of margin business. And I think the long-term prospects for it are very strong.

Thank you. Our next question comes from the line of PJ Juvikart with Citi. Please proceed with your question.

Yes, hi. Good morning, Peter. Morning. And good luck to Sean. Sean, thank you. We'll miss you. Thank you. Thanks for your slide 10 for ESG efforts. And my question is, you know, you're taking recycled PET bottles into terryl polyols. You mentioned you can take up to 60% RPET. You know, one of the peers, Eastman, is doing molecular recycling of PET. So I guess my question is, as demand for recycled PET goes up, And, you know, PET is much more easier to recycle than polyethylene. Do you think those RPET prices could go up?

No, I don't see that happening anytime soon. I mean, as I look at the source of our PET, and we're taking PET both post-consumer and post-industrial scrap. I cannot speak for Eastman, just for our efforts. We're using the equivalency of a billion and a quarter, billion and a half bottles a year of recycled PET. That's a small dent. We've got a lot more that we can be doing as an industry. We've got a lot more that we can be doing. I commend companies like Eastman and our efforts. The challenge of recycling any plastic is to be able to upgrade the value of it. Anybody can take a plastic and melt it, a used plastic, melt it down, and make it into a park bench. But you're not going to be able to ultimately take billions of pounds of plastics and convert them all into park benches. You've got to be able to take... a PET bottle or a polyethylene, a polypropylene, you've got to be able to take it and actually recycle it, hopefully, into something of equal value, or in the case of our polyols, something of even greater value. And so I think these are the initial steps. I think they're relatively small in the overall market, but I don't see the post-PET industry You know, in the foreseeable future, when I say that, I mean at least the next five years, five to ten years, I don't see there being, I wish there was, but I don't see there being a shortage. I'd love to say that, you know, that we're taking 100% of the world's PET that's being consumed and we're upgrading all of it. But it's going to be, you know, we've got some real work ahead of us.

Thank you. Our next question comes from the line of Jeff Zakowskis with JPMorgan. Please proceed with your question.

Thanks very much. I have a question on the polyurethane slide. Your MDI volumes decreased 7% year-over-year, but the year-over-year volumes were flat. How fast did the non-MDI volumes grow in the quarter? What are they, and are the margins comparable to MDI?

Yeah, I think that as we look at that, most of that volume is around polyols, and that's what we're blending with MDI to create specific effects, downstream effects, and so forth, and HBS in particular. And so as we're doing that, that's something that we certainly want to be doing is blending more polyols with more MDI because in doing that, we're creating – we're creating greater differentiated chemistry down below. So that's an area where we've seen significant growth.

Thank you. Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

Thank you. Peter, just on aerospace, with that market beginning to bottom or turn as we speak, Do you think you could still get back the entire, I think, roughly 80 million EBITDA you lost last year, or could you even do maybe better going forward?

I think we'll do better going forward. I think that the idea that you're going to be producing planes five, ten years from now with the aluminum content that you had a couple of years back, I don't think it's going to happen. I think when you look at the next generation 320 Airbus, the wing of the next generation 777X, the Boeing 787 and so forth, if anything, these are going to be having more carbon composite materials on a per plane basis. I'd also note that with the recent acquisition of the CDC specialty polymers group, There's additional exposure there. It's been a bit frustrating for us this year, but longer term, that additional exposure into the aerospace business is going to be significant. It's going to be something that we're going to be continuing to guard right now and make sure that we're nurturing it and we're caring for it now because I think longer term, it's going to add to what would otherwise be a normalized EBITDA in the aerospace industry.

Thank you. Our next question comes from the line of Matthew Dio with Bank of America. Please proceed with your question.

Morning, everyone. And I guess just to reiterate everyone else's sentiments, congrats, Sean, on your next steps. Seems to be a little bit of a theme here for Huntsman CFOs, so good luck there. Peter, you touched on this a little bit. Obviously we have some MBI over earning in the short term, but we're probably nearing the end of the global capacity build out. So even if we do loosen up here a little bit in the second half, how long do you think it takes before we tighten again? And, um, what do you envision for earnings or at least, you know, maybe margins for the industry, um, between 2022, three and four, that type of timeframe.

Well, I'm not sure we're – I certainly can't speak for the industry because I think one of the things we've seen in the last couple of years is I think you've seen a real bifurcation of corporate strategies. And we certainly have cast our lot into saying that we're going to go further downstream. We're going to buy those assets. We're going to buy into system houses. And we're going to deploy our capital further downstream. Now, again, that's not going to be – to say that we neglect the upstream of the business. But I think I publicly have said that we will not alone, on our own, use our balance sheet to go out and build a billion-dollar MDI capacity grassroots project somewhere around the world. We'd be willing to do it with, you know, through partnerships and so forth. We're not stressing our balance sheet over it. That's something that would have to be very appealing to us and to our shareholders. But we will be deploying projects. further capital as we look at it on a downstream basis. There's other of our competitors that have said that their priority is going to be focused on the upstream, adding the upstream tonnage and so forth. And look, I'm not saying one's right and one's wrong. We feel very comfortable with where we're going. And I would prefer with Huntsman that we are trying to move towards a higher margin with greater stability. Not necessarily greater volume, but just greater stability, and we've got that, hopefully, as we build out that downstream, we'll accomplish that. I have also said that in past calls that, you know, if we decided today to go out and build a new facility, grassroots facility, or even a significant expansion upon our existing facilities, this is a multi-year process. If you're really thinking about a grassroots facility, that is a new site that doesn't exist today, and you're starting with nitrobenzene and going all the way down through aniline and MDI and splitting and so forth, you're looking at a billion-plus dollar investment to build a minimal world-scale capacity, and you're probably looking at anywhere from, depending on where you're building it around the world, anywhere from five to eight years. And we've seen some false starts and stops here in North America. And I think that's just a testament as to how difficult it is to build these facilities. So, again, I'm not here saying that we're going to just get tighter and tighter and tighter as an industry, but you kind of project out a 6% growth and you kind of project out what would, in my opinion, be your normal incremental expansion of of 2% to 3% growth per year that you just have through greater efficiencies and operations and technology know-how and so forth. The industry does kind of get tighter and tighter over the course of the next couple of years. And it is a regional industry by and large. And so you're going to see some parts of the world that are going to be tighter than other parts. But by and large, I think it's going to be a balanced to snug industry over the course of the next three to five years.

Thank you. Our next question comes from the line of Adeline Rodriguez with Jefferies. Please proceed with your question.

Thank you. Good morning, guys. Peter, in terms of the impact of the semiconductor shortage on auto production, you've talked about maybe reallocating some of those products to other end markets. Can you elaborate on what end markets you're supplying that have similar or better margins than that, and were those markets undersupplied before?

Sure. You know, as was announced earlier, we've got Tony Hankins here, our divisional president over polyurethanes. And so, Tony, I'm going to – and one of my questions, too, would be why don't we get higher margins than just the automotive margins? Anyways, why don't you go ahead and answer that?

Thank you. Good morning. Thanks for the question. Yeah, the automotive products we manufacture are, you know, very specialty products. formulations going into the high-end auto market. But there are common characteristics with other markets, such as high-end furniture, for example, where we supply viscoelastic grades into high-end furniture. So there's a direct comparison, if you will, between high-end seating and high-end furniture. And the margins there are good or even better in some cases than in the auto market. So there's an opportunity. And that market's growing very fast at the moment. you know, we sold out into those areas. So this is very easy for us to divert products into those other high-end opportunities that we have.

Operator, I think we'll take one more question. And we've got Linedell who's starting their call, I think, here at the top of the hour. And I'd hate to deprive my friend Bob Patel any of his audience. So I have a couple of good tax questions I probably could think up for him. But anyways, let's take one more question, Operator. And we'll wrap up the call.

Thank you. Our final question this morning comes from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your question.

Great, thanks. Maybe you can just comment a little bit on long-term, Peter, and congrats, Sean, as well. But, you know, you noted $1.1 billion of normal EBITDA. What would you kind of view as peak at this point with the changes that you've made to the portfolio? Thanks.

Yeah, I'd hesitate to use the word peak just because I hope that if our portfolio is truly integrated and downstream, you know, we might see some times where our more commoditized products, as we've pointed out in our MDI business, are tight and you're going to experience higher than normalized earnings for a quarter or two. But as I think about peak sort of performance and performance products or advanced materials, even textile effects, and the majority of our MDI products in polyols and so forth, I don't see those products really peaking, if you will. I see them – You know, they ought to be growing it better than GDP. We ought to be able to expand margins faster than GDP sort of growth. And, again, depending on the macro economy, of which we're dependent, I would hope that we would be able to see a normalized number that continuously improves and equal to the EBITDA improvement is going to be generating growth you know, that level of cash of around 40%, high 30s, 40-ish percent, that we've been very consistent in being able to generate over the course of the last five or six years.

Thank you. Ladies and gentlemen, this concludes our question and answer session, and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.